Why many NBA draft picks will go broke

By Matthew Heimer

What job category offers average salaries of more than $5 million a year, along with a 60% likelihood of being bankrupt within five years of retirement? If you answered “professional basketball player,” give yourself a gold star. And with the National Basketball Association’s 2013 draft having wrapped up this week, it’s a good time to dig deeper into the economic forces behind those numbers.

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Will Anthony Bennett avoid the 60%?

Those salary and bankruptcy figures aren’t exactly shocking revelations, of course. Pro athletes’ financial woes are a staple of the news cycle, and they usually prompt predictable tut-tutting about the irresponsibility of young hotshots who get too much money too fast. But it’s easy for envious laypeople to overestimate the wealth of pro athletes, and to underestimate the challenges of managing it.

For starters, the “average” salary figure is heavily distorted by the top tier of established veterans, usually only about one per team, who make $12 million or more per year. (It’s another illustration of that old metaphor: If I’m sitting by myself in a Starbucks and Warren Buffett walks in, the average salary of the people in that Starbucks is suddenly two squillion per person, but I’m not actually any richer.) Sportswriter Steve Aschburner has estimated that the median NBA salary is closer to $2.3 million.

And even that figure reflects “survivorship bias,” since collective bargaining ensures that NBA veterans get salary increases if they’re able to hang on in the league. In contrast, many of the folks who got their moment in the spotlight during last night’s draft won’t even sniff that kind of money. Under NBA pay-scale rules, Anthony Bennett, taken as the No. 1 pick this year by the Cleveland Cavaliers, will likely earn between $4 million and $5 million a year for his first three seasons under NBA salary-scale rules. The next 17 draft picks will be guaranteed at least $1 million a year, but the rookie minimum can be as low as $490,000.

Cry me a river, right? But now let’s think about career longevity. A high-powered corporate executive can quite conceivably pull down a six- or seven-figure salary every year for two or three decades. But the average NBA career lasts six years, and this figure, too, is distorted by those whose stardom keeps them on the roster well into their mid-30s. Michael Wilczynski, who runs the NBA stat-geek website Weak Side Awareness, crunched some numbers in a 2011 article that show that the median career is closer to four years long, and that about 25% of NBA players are out of the game after just one year.

So if you’re really the “average” NBA player, chances are you’re looking at earning somewhere between $500,000 and $1.5 million, for four years. After taxes and paying your agent, you might clear $2 million by the time your career ends—but, of course, you’re “retiring” at age 25 or 26. If you’ve held on to your money, you’ve got a tremendous launching pad for the rest of your life. But if you’ve bought a “thank you” house for your parents (as Anthony Bennett has suggested he plans to do), or been sucked in to some dubious investments, or made lifestyle choices that overstretch your budget, chances are you’ve got almost nothing to show for your years as a millionaire — and you’re headed for that troubled 60% category.

Personally, I’m always encouraged when I read about younger pro athletes who bunk down with a teammate or two in a crummy rented condo unit so they can salt away some money for the future. It’s an acknowledgement that the flush times won’t—can’t—last forever, and that’s the first step toward making the right financial choices.

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Speaking of the ends of careers: This week’s draft was the last over which David Stern will preside as NBA commissioner. He’s due to retire next February at the end of his 30th year at the league’s helm. Below, he talks about economic opportunities for team owners and players in an interview The Wall Street Journal’s Lee Hawkins.

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.